UAE corporate tax: Pros and cons of grouping companies

A decision to join two or more entities together should not be made lightly

There are specific rules for creating a corporate tax group and the Federal Tax Authority is the final arbitrator on whether you may do so. Silvia Razgova / The National
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The UAE's Federal Tax Authority recently issued guidelines on the grouping of companies for corporate tax.

With two months until the end of the first corporate tax year, it is worth considering the potential benefits and issues that might arise from group structures.

A decision to join two or more companies together should not be made lightly. The process of bonding can be straightforward but the continuing management of its implications and the difficulty of extracting any elements from such a marriage can be stressful.

Consequently, it is not unusual to unbundle the multiple facets of an organisation.

Different sales streams, by product or market, might sit in their own entities.

Group functions such as finance and treasury may see their effectiveness improved by the distance such structuring creates.

There are elements that have their own intrinsic value, such as trademarks and patents.

As these may be divested or augmented, it is easier to complete due diligence, on-board or sell them if they are not glued into a greater corporate identity.

Finally, there might be a holding company. In larger organisations, their role is often not dissimilar to family offices. They manage the overall wealth of the group and focus on continuity over operational entities' shorter term targets.

UAE corporate tax: What you need to know

UAE corporate tax: What you need to know

Grouping for the purposes of corporate tax can be a sensible approach in some cases.

The key benefits are having to file only a single return within which intragroup trade sales are cancelled out. This is because the group sits as both the buyer and the seller. This works best where each separate entity represents a different stage of the same sales chain.

From a tax perspective, each part is joint and severally liable for the debts of the business. This should not create any issues unless there is an unhealthy culture of operational independence. I have seen that in practice and it can be destructive. There are often very valid reasons for being good corporate citizens.

While sometimes it is useful to look at VAT to see how its well-trodden framework might give us insights, here I find potentially only one.

Ungrouping is a far more daunting and difficult exercise than you might imagine. Therefore, I cannot recommend any structuring where there are regular changes in what juridical entities form part of a whole.

Time has a cost and a lot of it is expended in bureaucracy while waiting around to move forward.

Depending on the changes you wish to make, there are specific rules for each movement. Fundamentally, you can form, join, leave or cease to be a tax group, or you can replace the designated parent company with another entity.

Each comes with its own success conditions and specified times from when the change takes effect.

There are quite specific rules for creating a corporate tax group and the FTA is the final arbitrator on whether you may do so.

It begins with registration, which we know from the head of the FTA is being completed a lot slower and with a lower take-up rate than it would like. Hence the recent cabinet decision to encourage action.

Add in the requirement to update not just your formation documents but the identification of all owners holding more than 25 per cent equity, and it’s a laborious task.

It gets decidedly more complicated when registering an entity that has an overseas owner.

Which UAE authority do you think your non-UAE entity should select when entering its corporate information? There is no foreign option available.

As I alluded to earlier, these are stage tasks. You cannot move forward until you have completed, submitted and had approval from the FTA on earlier tasks. And yes, there are deadlines for completing everything or risk penalties.

Assuming all the above has been successfully navigated, you now need to maintain your group. I do not just mean reporting annually for corporate tax – that’s a given.

FTA approval can be taken away if there is a failure to maintain continuous compliance with the conditions that allowed the group's formation. The parent company in the structure must have available relevant, clear financial records and transfer pricing documentation.

The impact of failure is the unwinding, from the beginning of the relevant tax period, of its rights and privileges under its structure. Reassessment by the relevant authority can take place at any time.

Consider the additional workload of having to reprepare all your financial results. Take a tax group with six entities that in themselves have different fiscal years. Grouped, they share the same one. Tread carefully.

David Daly is a partner at the Gulf Tax Accounting Group in the UAE

Updated: April 01, 2024, 4:00 AM